In In re Oi Brasil, a New York bankruptcy court demonstrated the integral role that principles of comity and good faith play in Chapter 15 foreign recognition proceedings when it denied a Dutch petitioner’s request to modify or overturn its prior recognition order of a Brazilian bankruptcy proceeding (“Prior Recognition Order”).[1]The relevant entity was Oi Brasil Holdings Cooperatief U.A. ("Coop") that was a debtor in Brazil and the Netherlands.[2] In considering a request for recognition of the Brazilian proceeding, the bankruptcy court concluded that Brazil was Coop’s center of main interests (“COMI”) because of the nature of its operations – it was a financing vehicle for Oi and related entities.[3]After recognition of the Brazilian proceeding, the Dutch Insolvency Trustee for Coop, with the support of certain creditors, filed a petition for recognition of the Dutch proceeding.[4] Consequently, the Dutch trustee asked the bankruptcy court to vacate its Prior Recognition Order.[5]

Ultimately, the bankruptcy court addressed two key questions: (1) What the appropriatestandard ofreviewis whenapartyisseekingtomodifyorterminateapriorrecognitionorder; and (2)Underthat standard, which foreign proceeding -- Dutch or Brazilian – would be Coop'sCOMI.[6]

The Dutch trustee proposed a de novostandard of review for the Prior Recognition Order, which the bankruptcy court rejected as incompatible with the goals of Chapter 15 of the Bankruptcy Code.[7] Similarly,the bankruptcy court also rejected the Dutch trustee's proposed application of judicial estoppel[8]because theCOMI inquiriesbetweentheEuropean Union’s(“EU”) regulatoryscheme, which was applied in determining whether to open the Dutch bankruptcy,andChapter15were“conceptuallyand procedurallydifferent.”[9]

The bankruptcy court agreed with the debtor that §1517(d) of the Bankruptcy Code applied to the request to terminate recognition of the Brazilian proceeding.[10]Under section 1517(d), a bankruptcy court may modify or terminate a prior recognition order if: (1) the original circumstances for granting recognition were lacking at the time it was granted; or (2) such circumstances have since fundamentally changed.[11]Applying the permissive §1517(d) standard, the bankruptcy court rejected the Dutch trustee's position that it must defer to the Dutch petition under principles of comity.[12]Among other things, the bankruptcy court found it unlikely that the creditors’ expectations of Coop's COMI had materially changed since its Prior Recognition Order.[13]In addition, the bankruptcy court, applying "COMI manipulation principles,"[14]found bad behavior by a Dutch creditor in both proceedings as an “independent basis to decline to exercise discretion” under § 1517(d).[15] Accordingly, the bankruptcy court rejected the Dutch trustee’s petition.

The Oi decision clarifies how bankruptcy courts may addresses conflicting claims of recognition of foreign proceedings. Unlike prior courts addressing different approaches to determining a debtor's COMI, the Oicourt addresses the issue of a debtor having multiple recognized COMI's. In this regard, the Oicourt drew an important distinction by determining that a bankruptcy court need only defer to principles of comity after it has granted recognition.[16]

[7]See id. at 197 (rejecting proposed de novoreview under §1517(a) "because it reads subsection (d) out of the statute"); Id. at 203 (rejecting stringent Fed. R. Civ. P. 60(b) review because "the recognition process must be sufficiently flexible to achieve the goals of Chapter 15"); see also In reSPhinx, 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006) (noting flexibility in Chapter 15 cases because of necessary considerations of international comity).

[12]In re Oi Brasil, 578 B.R. at 212 (“Recognition which one nation allows within its territory to the legislative executive or judicial acts of another nation, having due regard both to international duty and convenience….”) (quoting Hilton v. Guyot, 159 U.S. 113 (1895)).

[13]Id. at 225. The primary factors for the bankruptcy court’s determination included the "significant legal and pragmatic limitations" on the Dutch trustee and the "economic realities" of Coop as a special purpose vehicle. Id. at 233 (finding Dutch trustee's advisory authority inadequate because Coop Board maintained separate existence and sole power to propose a restructuring plan); see alsoIn re OAS, 553 B.R. 83, 101 (Bankr. S.D.N.Y. 2015) (finding special purpose nature of entity was material in COMI determination).

[14]Id. at 243 (stating the “result here is certainly not a traditional application of COMI manipulation principles, normally applied to a debtor”)